Micron: No New Capacity at Hynix, Says Jefferies; Merrill, Wells See Rising Competition

By Tiernan Ray

The debate continues around the DRAM industry and what is going on with SK Hynix (000660KS), the South Korean manufacturer that was the subject of speculation last week about the prospect it might be increasing production, which might imperil other manufacturers, such as Micron Technology (MU).

The company held a conference call on Friday, notes Jefferies & Co.’s Hyunwoo Doh in a note to clients this morning, during which the company discussed starting construction in the middle of next year “of a new DRAM fab to replace its M10 fab in Icheon,” according to Doh’s recounting of the call.

Doh notes this is a replacement for existing capacity at the M10 facility, “rather than for additional capacity.”

Doh thinks investor concerns about increased supply in the DRAM business are misplaced, as the new factory “is unlikely to lead to notable growth in industry capacity:

SK Hynix’s current M10 fab is the result of renovations to its previous 8” fab. With facilities divided between three buildings, the fab is cramped and inefficient. As such, the company would inevitably face a sharp decline in capacity going forward, as the migration to 2Znm DRAM in 2015 would require additional equipment and process steps. The new fab will be housed in a two- story structure to prevent space restrictions from causing a decline in its capacity as it migrates to advanced processes. The company currently has a DRAM capacity of 140k wafers at its Icheon fab and 140k at its Wuxi fab, for 280k in total. Without construction of a new fab, the company’s capacity would fall to 210k wafers when the M10 fab migrates to 2Znm in 2015. By building a new fab and relocating equipment from the M10 fab, SK Hynix should be able to keep its total capacity near 230k wafers. Moreover, the high ceiling of the new fab will allow the company to install EUV equipment needed for the migration to advanced processes going forward. In all, the construction of a new fab will raise SK Hynix’s capacity by just 20k wafers (following the migration to 2Znm), equaling 2% of global capacity. As such, the addition of the new fab should have a limited impact on global market supply.

Doh has a Buy rating on the shares, and a ₩50,000 price target. Hynix shares today rose nearly 5% to ₩37,000 in Seoul trading.

There were some negative views, however, as well, today. As I noted earlier, Merrill Lynch’s Simon Woo cut his rating on Micron shares to Underperform from Neutral, citing the Hynix issue specifically as a source of rising competition and weaker prices.

And another bear, Wells Fargo chip analyst David Wong, who also has an Underperform rating on Micron, noted this morning an article in the Korea Times claiming Hynix has recovered from a fire that hobbled production back in September of this year.

Wrote Wong, “Our checks directly with Hynix suggest to us that this news is correct,” and as a consequence, “We think DRAM output from Hynix could rise substantially over the next few weeks while DRAM demand moves into the seasonally weak period of the year, potentially resulting in significant pressure on DRAM prices.”

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.